2023 has come. Looking back at last year, global economic growth has slowed down significantly due to the impact of multiple factors. Factors such as high global inflation and the chain reaction caused by repeated new crown epidemics in many places have brought more uncertainties to the investment market. The world’s major central banks, represented by the Federal Reserve and the European Central Bank, have set off a wave of aggressive interest rate hikes in order to resist the deterioration of inflation and prevent structural risks. The traditional financial investment market has experienced repeated shocks from the rise of the US dollar exchange rate and the successive declines in global stock markets. Major economies are struggling to move forward under the shadow of the financial crisis.

As one of the important investment markets, the crypto market is also difficult to survive alone. After experiencing the cold winter after the largest bull market in history, the leverage behind the prosperous bubble gave birth to the most tragic crypto market chain reaction collapse since the birth of Bitcoin. The collapse of LUNA-UST, the bankruptcy and liquidation of Three Arrows Capital, the sudden death of FTX… How to find a way to survive in this crypto winter has become the consensus of the industry.

Stagflation and Rate Hikes: Noose and Dagger?

According to the International Financial Forum (IFF) report, the global economy is expected to grow by 3.1% this year, lower than the 6% increase in 2021; global consumer prices (CPI) are expected to rise from 4.6% in 2021 to 9.0%. Global economic growth has slowed down significantly due to the impact of multiple factors such as rapid inflation, monetary policy shifts in developed countries, the war between Russia and Ukraine, repeated outbreaks of new crown pneumonia in some regions, and persistent global supply-side bottlenecks

The acceleration of global inflation reflects many factors, including a rebound in consumer demand due to the improvement of the epidemic, a surge in liquidity generated by large-scale quantitative easing policies, rising commodity prices such as energy and food, and persistent supply chain bottlenecks caused by the epidemic . Rising prices for commodities such as energy and food partly reflect market changes triggered by the Russo-Ukrainian war and related international relations. Inflationary pressure is expected to continue in 2023, but the market generally believes that global inflation will ease due to various reasons. There are three main supporting factors:

The prevention and control of the new crown epidemic has entered a new stage, and the pressure on the supply side has slowed down;

Demand slows down, and commodity prices may soften;

Global monetary tightening has played an effective role in curbing inflation.

However, there is still a huge downside risk in the global economic outlook. If the risk is not avoided, the global growth rate will slow down more than expected, and inflation will continue to deteriorate, which will eventually lead to the possibility of the global economy falling into recession or stagflation.

Black swan events such as regional war conflicts and epidemics have worsened again

Inflationary pressures failed to slow down as expected

The continued appreciation of major currencies represented by the US dollar led to the debt crisis

The interest rate hikes and balance sheet reductions of major central banks represented by the Federal Reserve have triggered a tightening of global financial conditions, which will have a major impact on the financial stability of some economies. Higher international borrowing costs and capital outflows have put pressure on these countries’ foreign exchange reserves, devaluing their currencies and making it more difficult to service foreign debt. Due to the impact of the epidemic and other factors, the public debt-to-GDP ratio of emerging market countries will rise to an average of 64% in 2021, a new high. The depreciation of the currency will inflate the government’s external debt denominated in the local currency, making public finances more difficult, and there is less room for fiscal policy support. According to the International Monetary Fund (IMF), 60% of low-income countries will be in or about to fall into government debt distress in the second half of 2022, which will directly affect the confidence of investors and consumers and constrain the recovery of the global economy.

As of December 1, the U.S. government debt has greatly exceeded the U.S. GDP of about $23 trillion in 2021, and has approached or even exceeded the statutory debt limit of $31.4 trillion several times.

In the final analysis, how to curb inflation as soon as possible while avoiding stagflation is the key to promoting global economic recovery.

The Fed has raised policy rates six times this year and has signaled more hikes to achieve its 2 percent inflation target. Quantitative easing has more than doubled the Fed’s balance sheet from about $4 trillion before the pandemic to nearly $9 trillion in early 2022. The Fed ended expanding its balance sheet in March and began shrinking it in June.

The ECB has raised its benchmark interest rate twice this year, from zero to 1.25%. Given that inflation is currently well above the medium-term target of 2%, rate hikes are expected to continue. The ECB ended its balance sheet expansion in March this year, but has yet to start shrinking it. But with that came global financial markets reacting sharply to the tightening of monetary policy, with stock markets falling, volatility rising and global currencies depreciating against the dollar.

The above impacts directly affect changes in the financial investment environment and economic growth. The U.S. is forecast to grow 1.6% in 2022 and 1.0% in 2023, down from 5.7% in 2021. The main reason for the slowdown is that rapidly rising inflation has reduced household purchasing power, while tightening monetary policy and financial conditions have constrained private investment. The EU is expected to grow by 3.2% in 2022 and 0.7% in 2023, down from 5.2% in 2021. The main reasons for the economic slowdown include the decline of household purchasing power caused by high inflation, the impact of the Russian-Ukrainian war on energy supply and prices and the uncertainty brought about by it, and the tightening of monetary policy. To curb inflation, the ECB ended its net asset purchases in March 2022 and began raising interest rates in July. Among the three EU members, Germany is projected to grow by 1.4% and -0.3% in 2022 and 2023, France by 2.5% and 0.6%, and Italy by 3.2% and 0.2%.

How to View the Emerging Crypto Market

The global financial environment is affected by the monetary policies of major central banks, the war between Russia and Ukraine, the new crown epidemic and other factors, resulting in a period of time. The decline in market confidence and private investment willingness has caused a decline in the overall investment market, and concerns about economic recession continue to envelope the market.

As one of the major investment markets, the cryptocurrency market is also deeply affected by changes in the global financial environment.

Here, a representative event is used as a case for analysis.

Crypto Regulatory Changes in Major Economies

The regulation of emerging crypto markets in major economies is also in a state of dynamic development. In the common-law countries represented by the United States, the overall ideology is based on the individual-centered, market-based and industry self-discipline based on economic liberalism centered on the market and the individual. In June 2022, key members of the U.S. House of Representatives and Senate Commerce Committees jointly released a draft of the U.S. Data Privacy and Protection Act (ADPPA). In terms of main content, more stringent compliance obligations have been established for “large data holders”. And crypto service providers are undoubtedly an important part of it. The European Parliament and Council also reached an interim new agreement in June 2022, seeking consumer protection and a unified legal framework for cryptocurrencies in the EU. MiCA (Markets for Cryptoassets) will cover cryptoassets not regulated by existing financial services legislation. ESMA (European Securities and Markets Authority) will provide guidance in this regard. The new rules will impose strict operating rules on stablecoins, limiting their widespread use as payments, capping transactions at 200 million euros per day.

In Asia, the competition for the crypto financial center is kicking off. In October 2022, the Hong Kong SAR government issued the “Policy Declaration on the Development of Virtual Assets in Hong Kong”, which clarified the policy stance and guidelines for the development of the virtual asset industry and ecosystem, and demonstrated the local government’s vision for the virtual asset industry. And Singapore, which has always been more active in crypto institutions, is also not to be outdone. As early as May this year, Singapore Deputy Prime Minister Wang Ruijie publicly stated that he would build Singapore into a “decentralized financial center.” But what needs to be vigilant is that in a relatively relaxed market environment, avoiding vicious competition in the industry will become a new challenge.

Crypto Markets Fall Amid Global Rate Hikes

Under the influence of multiple factors, global inflation is high, and anti-inflation has become the main theme of the central bank this year. As the core institution, the Federal Reserve has continued to implement a tightening monetary policy this year, and the frequency and frequency of interest rate hikes have increased significantly.

In the context of global capital tightening, major asset classes have fallen sharply, and the crypto industry, which has a higher leverage ratio than traditional industries, bears the brunt of the violence.

Ukraine Announces Acceptance of Crypto Donations During Russo-Ukraine War

Cryptocurrencies have become one of the focal points in this regional war that affects the world. Within days of the conflict erupting, the Ukrainian government’s official Twitter account posted a post that included bitcoin and ethereum wallet addresses, hoping donors would donate BTC and ETH, an initial donation drive the government embraced in times of crisis. One of the historic moves for cryptocurrencies. Immediately afterwards, the Ministry of Digital Transformation of Ukraine also launched the NFT Museum to sell NFTs recording war events in order to raise more funds. The role of cryptocurrencies has demonstrated the power of “borderless” more clearly than ever before.

Chain Reaction

Due to factors such as insufficient market development of the crypto industry, lagging regulatory development, and relatively low market volume, the characteristics of high risk-return ratio, accumulated leverage, and high degree of industry target tightness have resulted in a large-scale crypto industry in 2022. Chained “crash”.

And it all stems from the chain reaction caused by Bitcoin oversold. On May 8, the seigniorage share-based algorithmic stablecoin UST issued by LUNA experienced a death spiral due to the sell-off of LUNA. UST quickly went from decoupling to the collapse to zero. The blessing of the two phases also led to the loss and bankruptcy of cryptocurrency investment institutions represented by Three Arrows Capital.

Ethereum 2.0 merge upgrade

After June’s liquidity crisis, investor hype over Ethereum’s merger could to some extent take the market out of despair, and discussions about the network’s proof-of-work fork ignited more investor enthusiasm.

In the end, the merger was officially completed on September 15, 2022. This is also known as the largest crypto technology update since the launch of Bitcoin, and it can be regarded as one of the milestone events in the history of crypto.

Exchange FTX Declares Bankruptcy

On November 11, FTX, one of the world’s largest centralized crypto asset exchanges, declared bankruptcy. When declaring bankruptcy, FTX only held $900 million in salable assets, while its liabilities were $8.9 billion, with a funding gap of up to $8 billion, and user assets were misappropriated.

The chain collapse of crypto institutions represented by FTX and Three Arrows Capital stems from the lack of supervision in the investment market, misappropriation of funds, increased leverage, risk transfer of fund holders and other behaviors with too few restrictions or too low costs. The fact is that in 2022, many countries will continue to advocate for increased regulatory intervention in the crypto market. Although a large number of institutions will be in trouble in 2022, this proves that the environment of the crypto investment market is gradually moving towards a healthy and orderly environment.

As mentioned above, there are differences in the regulation of the crypto industry in major economies.

On the one hand, the reason for the difference is due to the differences in the economic development levels of various regions. Unlike digital financial industries such as digital banking and digital insurance that have matured for a long time and have entity regulatory objects, cryptocurrency is currently the fastest-growing and most controversial digital financial industry. , the most difficult area to supervise, and may bring subversive impact on the existing financial system. On the other hand, it is also constrained by the different stages of development of the crypto market.

Compared with relying on external supervision, which needs to be solved one by one from the technical and legal levels, the internal innovation of the industry is more urgent and effective at this moment in 2022.

After the FTX incident, the centralized exchange business, which is the foundation of the crypto market, encountered a crisis of trust in the industry. How to ensure the security of funds has become the foundation of the cornerstone of stable industry trust. crypto institutions that provide fund custody services centrally issue proof of reserves (PoR: Proof of Reserves, proof of reserves means that custody businesses holding cryptocurrencies should create public credentials about their reserves and match proofs of user balances/debts ).

At present, although proof of reserves can provide a certain degree of proof of financial solvency, it still has certain limitations. For example, the capital snapshot proves that there is room for fraud, and the disclosure of funds/liabilities is incomplete and other problems still exist. But we have to admit that this has positive significance for improving the transparency of the industry and regulating practitioners. In the long run, the adoption of the Proof of Reserve standard is a form of self-regulation that can enhance user confidence in centralized platforms and the industry. A safer ecosystem will attract more investors and provide more institutional capital to flow into the crypto market. springboard.

On the other hand, the market’s voice for decentralized business has begun to rise. From a practical point of view, decentralized transactions not only increase transparency, but also automatically execute the entire financial agreement through smart contracts, which greatly reduces potential risks in the process of centralized transaction services, such as embezzlement of funds. However, based on the constraints of current technical conditions and other factors, the existence of the impossible triangle of decentralization, security, and scalability shows that security improvement is still the current bottleneck encountered by DEX business development.

Moreover, the development of the Web3 track in 2022 is also in full swing. Web3.0 is relative to Web1.0 and Web2.0. Web3.0 is essentially a contract. This contract forms a common standard through blockchain and other technologies, which is common in different APPs and fields, which provides the possibility for users to interact in a wider range. Therefore, Web3.0 can be called the Internet of Contracts. Today’s Web3.0 is actually a new network production organization based on the underlying architecture of the blockchain. Its core is to return the control of the Internet to users, and to add content to the Internet through user creation. In the process, a distributed production organization system is formed through blockchain, such as DeFi and NFT.

At present, the blue ocean of Web3.0 is waiting for Internet companies to explore. But at the same time, it should be noted that the current Web3.0 is actually an extension of blockchain technology, and the major Internet platforms are still in the technical reserve stage. Many Internet platform companies only use the concept of Web3.0 to lay out the future form of their business, and may not have a clear path to realize Web3.0 technology. Although there are many practical attempts in the blockchain platform represented by Ethereum, many of the practices are based on financialization, and there is still a long way to go before the popularization of tools. Therefore, the current Internet giants should reserve at the technical level and actively explore at the level of application scenarios to provide more possibilities for the future development of Web3.0.

Conclusion

2022 may be a difficult year for the crypto industry and even the global financial investment market, and the concentrated outbreak of risk points under the influence of the black swan event is the main influencing factor. But for investors, risks also mean opportunities, and the crypto industry may usher in a spring after a storm. For practitioners and investors in the crypto market, the term “turmoil” runs through the year. From relief in wars to outbreaks of industry turmoil, the entire market is feeling the menace of a bear market in its ups and downs. The crypto market is both emerging and more global. As mentioned above, the crypto market will respond most sensitively to major events, but because of such characteristics, several events that have occurred in 2022 It is not difficult to find that it has super anti-fragility.

This is like two sides of a coin. On the one hand, it represents that crypto finance is not only a new financial format, a new stage of financial development, but also a continuation of the continuous development of the financial industry. But on the other hand, the problems in the global financial market have also been magnified and intensified in the crypto market. Through the self-regulation of practitioners and the development and upgrading of reasonable supervision, the future of the crypto market is still promising.

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Filed under: Bitcoin - @ January 1, 2023 8:18 am